Business goes begging for sound policies

With a new Labor leader in place and an election in sight, there seems to be one common issue with both Tony Abbott's and Kevin Rudd's economic campaign policies: the smaller the number of people affected by some policy or proposal, the bigger the fuss politicians are willing to risk making about it, writes Emma Alberici.

So far, neither Kevin Rudd nor Tony Abbott seems sure about what Australian businesses need in order to keep the engine of the economy humming.

Three months out from an election, a party leader's instincts may be to promise tax cuts, ease specific regulatory hurdles and introduce workplace flexibility but, like everything else in this Clayton's campaign, there isn't much political orthodoxy at play here.

Instead, one of the first features of the Rudd revival was a commitment to push through laws to make it tougher on employers who look overseas to fill job vacancies that require particular skills. With unemployment at a mere 5.5 per cent, finding local labour in all sorts of industries is proving difficult.

There are shades of Bagehot's law in both the Coalition and Labor's recent rhetoric: the smaller the number of people affected by some policy or proposal, the bigger the fuss politicians are willing to risk making about it (think of Tony Abbott's "signature" paid parent leave policy).

The former Prime Minister, Julia Gillard told us that the granting of 457 visas was "out of control". Foreign workers, she said, were pushing ahead of Australians in the jobs queue. Her immigration minister, Brendan O'Connor claimed that more than 10,000 people on 457 visas were being exploited. ALP vice-president and secretary of the Transport Workers Union, Tony Sheldon compared the use of 457 visas to "human trafficking".

But how many people are actually affected by Brendan O'Connor's claims of widespread rorting? According to research by The Migration Council of Australia, it's just 2 per cent (2,100).

During Julia Gillard's three years as prime minister, the unions had some significant triumphs beyond the tightening of the 457 visa regulations. Legislative changes expected to pass the Senate this week would result in expanded union rights of entry. The Fair Work Amendment Bill 2013 would require employers to subsidise union recruitment trips to remote sites including the payment for travel and accommodation. Employee lunch rooms would need to be opened to union representatives to facilitate their attempts to sign up new members. Only 18 per cent of the country's workers currently belong to a union. The Australian Mines and Metals Association has issued a statement appealing to the Senate to take the "opportunity to end the government's ongoing pandering to its trade union constituents." AMMA claims that laundry hands and cleaners in Western Australia's remote mining towns are now earning $300,000-plus a year thanks to the egregious demands of the country's unions. AMMA contends that the new laws have the potential to weigh even more heavily on productivity. It says it has no objection to union right of entry but would prefer it to be mutually agreed. The Coalition's IR policy released on May 9, 2013 wouldn't allow unfettered union access to worksites but otherwise the document doesn't seem to deviate very much at all from the current arrangements.

Mr Abbott is vowing to lift the company tax rate by 1.5 per cent (for 3,000 of the country's biggest businesses) to fund his parental leave scheme which would pay women up to $75,000 over six months. Recent Treasury analysis suggests the cost estimates of the policy are too conservative and likely to blow out by billions.

At a time when productivity growth is at an alarming low, the priorities of the two major parties, as they relate to business, don't make much sense. Since 2005/06, labour productivity (real gross value added per hour worked) across the Australian economy as a whole has grown at an average annual rate of just 0.6 per cent compared with 1.9 per cent per annum over the first half of the 2000s, 2.5 per cent per annum over the second half of the 1990s and 1.7 per cent per annum during the first half of the 1990s. Going back to the 1960s, there is no period of five years or more during which labour productivity growth has been slower than that since the mid-2000s. As the Nobel Laureate Paul Krugman put it in 1992, "productivity isn't everything but in the long run, it is almost everything". As he went on to explain, "a country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

The greatest problem for Australia is that the country's economic prosperity is almost exclusively tied to the resources boom. It's what has made us rich but it's also where productivity has stalled. McKinsey & Company makes the point in its report Beyond the Boom: Australia's Productivity Imperative the "magnitude of the resources boom has distorted perceptions of the economy's overall health". Capital investment and the terms of trade, not productivity, are driving growth.

Chief economist with Bank of America Merrill Lynch, Saul Eslake raised the former prime minister's ire when he dared to forecast a 25 per cent chance Australia will plunge in to recession in 2015/16. In another two years or so, work on the seven major Liquefied Natural Gas projects now under construction will be complete and resources investment will be detracting from overall growth not adding to it.

Julia Gillard was wrong to chastise Saul Eslake who was merely stating the facts. "The risks of a downturn are increasing with the non-mining sectors of the Australian economy responding less promptly to lower interest rates than history would suggest it should." At best, he is projecting growth will slow to less than 2 per cent in 2015 and 2016. Goldman Sachs economist Tim Toohey downgraded his GDP forecasts for Australia for the next two years and also raised the possibility of Australia entering a recession.

When Kevin Rudd addressed his first press conference as Prime Minister (Mark II), he announced that Tony Abbott would drive the economy in to recession. Presumably here he's talking about the dreaded "A" word.

Nowhere in the developed world has an austerity agenda lifted an economy out of the doldrums but there's little fear of an Abbott Government "cutting to the bone." According to the budget papers, the Coalition didn't once deliver a cut in real spending in any of its 12 budgets. Mr Rudd also told the gathered crowd that "the China resources boom is over" and flagged the challenges that presents. He says he wants to be Prime Minister of a country "that makes things". This will be difficult given that manufacturing as a proportion of GDP is just 7 per cent and Australia ranks equal last with Luxembourg on that score. Short of an industry policy that involves throwing buckets of money at flailing industries, it's hard to see what Labor's prescription might be.

Tony Abbott is promising a "modest" company tax cut "when affordable". His arguments about unnecessary red and green tape resonate in boards and on the shop floor. According to the Coalition's deregulation taskforce, Labor has introduced 23,000 new rules since 2007. The message sounds good but would be better if it came with some indication about which laws the Coalition thinks business would be better off without... like the Carbon Tax.

Under Labor, the Carbon price is supposed to this week jump from $23 to $24.15. If the new/old Prime Minister Kevin Rudd decides to scrap the tax before Mr Abbott gets a chance to, he could link Australia's Carbon price to the European Emissions Trading Scheme. It solves one political problem but ignites a rather large fiscal one. The price would drop to $6 immediately. The costs to business and households would fall but so would Government revenue. Moving to the ETS 12 months earlier than intended is expected to cost the budget $5 billion in just 2014 alone. The Coalition's Climate Change policy is a little less certain in its effect on business and the budget. The Direct Action approach is supposed to cost $300 million rising to $750 million in the third year. It rewards businesses who cut their emissions but the plan has no positive effect on the budget. What's not clear is what happens to companies that don't reduce their carbon footprints. The Coalition's Greg Hunt has rejected the idea of a penalty.

The scary political ghost of Work Choices will render IR policy announcements unlikely during this election campaign. The one hope left for business is that the parties put some serious thought in to reforming the tax system. Former Treasury secretary Ken Henry reviewed the Tax Act in 2010 and provided 138 recommendations. Among them was the Resource Super Profits Tax which eventually cost Kevin Rudd his job as PM the first time around and in its revised form brought in eight times less than the amount forecast. The successful implementation of that tax was supposed to usher in a new era of lower company tax (25 per cent versus current 30 per cent) and higher superannuation contributions. Australia's company tax rate is among the highest in the world (24 per cent Finland, 16.5 per cent in Hong Kong, 12.5 per cent in Ireland, 28 per cent in New Zealand). When the GST was introduced in 2000, the promise was that so many other taxes would be abolished that Australia's Tax System would be streamlined and simple. The Tax Act would was to shrink from 4,000 pages to 1,000. Fast forward 13 years and within that time, the Act has grown to 7,500 pages - almost twice its pre-GST size.

Tony Abbott has pledged to launch another review of the Tax Act. If the Coalition is elected, he has revealed that the GST would be included in that white paper. This raises the prospect that the 10 per cent rate could be lifted and/or the tax broadened to include food, education and health services. At the time the exemption was announced, the foregone revenue was calculated at $23 billion a year. It's big ticket items like this that will need to be considered if the budget is to be brought back to black. Most Australian business groups now agree that changing the GST framework so it brings in more money is the most prudent path to fiscal balance and avoids more costly alternatives but Labor under Julia Gillard wouldn't countenance any such thing.

First, though, the Government must get its team right if business is to take it seriously. Six small business ministers and five Cabinet reshuffles in three years has tested their patience. Kevin Rudd has listed a meeting with the folks in the business community and the unions as among his top priorities. Now all the new, more collegiate Kevin will need to do is listen.

Emma Alberici is a host for ABC's Lateline program. View her full profile here.